On Friday, Ste. Michelle Wine Estates (SMWE), the largest winery in the Pacific Northwest and third-largest premium winery in the country, was sold to Sycamore Partners, a New York-based private equity firm. Sycamore, which specializes in retail and consumer investments, will purchase the company in the second half of this year from the current owner, tobacco giant Altria, for a cool $1.3 billion in cash.
“The scale of this investment is significant,” says Ryan Pennington, senior director of communications and corporate affairs at SMWE. “And we see that not only as a significant vote of confidence for our team, and our estates and brands, but really for the entire Washington wine industry.”
SMWE includes Chateau Ste. Michelle, the winery’s flagship brand, along with 14 Hands and Columbia Crest in Washington; Erath in Oregon; and Patz & Hall in California, among others. Founded in 1967, Ste. Michelle was purchased by U.S. Tobacco (UST) in 1974 and became part of Altria when that company bought UST in 2008.
SMWE’s economic and cultural impact on Washington wine is enormous. The company contracts the majority of wine grape acreage and makes approximately 7.3 million cases of wine annually, a majority of the state’s total.
“Can you point to another viticultural district anywhere that has such dominance in terms of volume that Ste. Michelle has for the wines of Washington? I don’t think so,” says Bob Betz, who spent 28 years at the company before leaving in 2003 to focus on his own brand, Betz Family Winery.
Since its founding, there has been one constant at SMWE: growth. The winery increased production and added brands, which former CEO Ted Baseler referred to as a “string of pearls.” An entire industry rode the wave of the winery’s success, with the state growing from less than 200 wineries in 1999 to more than 1,000 today.
However, over the last four years, that success experienced headwinds. Between 2016 and 2020, SMWE’s annual volume decreased by 1.2 million cases. Last year, Altria announced a $292 million inventory write-off and $100 million in losses on non-cancellable grape purchases for SMWE in what the company termed a “strategic reset.” The company says it misjudged supply and demand forecasting and underinvested in direct-to-consumer sales.
“We just weren’t as close to our consumers as we needed to be,” says Pennington.
“Can you point to another viticultural district anywhere that has such dominance in terms of volume that Ste. Michelle has for the wines of Washington? I don’t think so.” —Bob Betz, Betz Family Winery
The company also strongly felt the effects of the pandemic, with a larger percentage of on-premise sales relative to its competitors due to the premium nature of its portfolio, according to Pennington. Given the myriad issues, layoffs ensued.
SMWE asked growers to crop at lower levels rather than refuse fruit it had contracted, as it had the prior year.
“That’s helped,” says Yakima Valley grower Dick Boushey. “If they hadn’t had done that, I think we’d still be in a world of hurt.”
On the winery side, money to promote the state’s bottles comes in part from government-mandated assessments on grapes and wine. When Washington’s largest player produced less of both, the state-funded agency responsible for marketing Washington wines received fewer dollars. Smaller in-state operations suddenly needed to do more work to get their wines seen, tasted and purchased.
“When the mothership has some tough sledding, that impacts everyone,” says Chris Sparkman, owner and winemaker at Sparkman Cellars in Woodinville.
During this time, there were changes at key positions throughout the company. In 2018, Baseler, who spent 17-plus years as president and CEO, retired. Jim Mortensen, a previously retired Altria executive, succeeded him and emphasized innovation. However, Mortensen’s tenure was always expected to be transitional, and in October of 2020, he hand-picked his successor, David Dearie. The former Treasury Wine Estates CEO’s first order of business was putting in place a long-term strategic plan focused on growing and refreshing the company’s core brands.
“At that point, it became apparent to both us and to our current owners that the best path to executing that plan would be under new ownership,” says Pennington. “The foundation of this partnership [with Sycamore] really is our plan for growth, and it takes investment to grow.”
Some of that work has already started. This year, the winery’s Chateau Ste. Michelle and 14 Hands brands changed labels. The company’s fortunes have also begun to improve, with net revenues increasing in Q1 and volume sales up.
While any corporate sale brings anxiety for those impacted inside and outside the company, many are optimistic about the future.
“I think there’s a lot of relief,” says Boushey of the sale. “I think Altria was tired of putting money into it. I hope Sycamore takes advantage of the people [Ste. Michelle] has and helps them grow in certain areas.”
“When the mothership has some tough sledding, that impacts everyone.” —Chris Sparkman, Sparkman Cellars
There’s also some trepidation in the wine community.
“What they typically do is try to skinny down and sell off pieces and sell off brands, and I don’t know if that’s good or bad,” says Marty Clubb, co-owner and managing winemaker at L’Ecole No. 41 in Lowden, of private equity firms. “The ‘string of pearls’ might get broken.”
As SMWE has struggled in recent years and chatter in the industry about a potential sale grew to a fever pitch, many assumed the company would be sold to another wine group, with the palace intrigue who it would be. Had that happened, personnel changes might have occurred. Instead, the leadership team and SMWE’s employees are expected to remain in place.
“They’ve been very clear that they are buying into our people and our culture, as much as they are buying the company itself,” Pennington says of Sycamore.
Though it’s been a difficult few years for Washington’s most recognizable brand, much of Washington’s wine industry has continued to flourish.
“We’re booking sales faster than ever,” says Clubb. “All of a sudden, you’ve got some big California players circling in Washington. I’m pretty optimistic about where the industry is headed.”
“I’m excited for [SMWE] and for our state really,” he says. “Washington continues to be sitting in a very strong position globally, regionally and locally.”
In many respects, the sale of Ste. Michelle marks a return to its roots. For nearly 40 years, SMWE has been a subsidiary of tobacco corporations. Now, the winery is now back to being the independent entity it was prior to 1974.
“At the end of the day, our destiny is still in our hands,” says Pennington. “If we’re successful, if we go out and execute our plan, [Sycamore is] going to be happy. And if we don’t, there will be consequences, and that’s true of any business.”